Question

4

Given a choice of two investments, would you choose one that pays a total return of 30 percent over five years or one that pays 0.5 percent per month for five years? What annual rate of return does each give you? Instructions: Enter your responses in percentages to the nearest hundredth, for example, 3.00 for 3 percent. The return of 30 percent over 5 years provides an annual return of percent. The return of 0.5 percent per month for 5 years provides an annual return of 6.17 percent. The investment that pays 0.5 percent per month over 5 years is preferable.

Answer 1

Answer to first question in the list: Part-(a) #of years left to maturity, NPER 5 Annual investment amount, PMT 0 100 [Assumed initial investment] 130 [30% return earned over 5 years -->100 (100 x 30%) 130] 0 0 if compounded at the end of each year; 1 if compounded at the beginning of each year 5.39% [Ref: NOTE] Initial investment amount, PV Maturity value at the end, FV Interest compounding type, TYPE Annual return associated with When compounded monthly, Effective Annual Rate (EAR) [(1+ Nominal monthly interest rate)12- 1 Part-(b) Nominal monthly interest rate Number of frequencies in a year 0.50% 12 _[(1+0.50%)21 Annual return associated with 6.17% 1 - The investment that pays 0.5 percent per month over 5 years is preferrable as its annual return is greater than 30% return earned over 5 years

NOTE Annual return associated with is calculated using EXCEL FUNCTION RATE(nper,pmt,pv,fv,type) where nper-5; pmt-0; pv=100; fv=-130; Here, pv is positive as it denotes cash outflow; fv is negative as it denotes cash inflow; type-0 as interest compounded at the end of each year only. A C D E 1of years left to maturity, NPER 2 Annual investment amount, PMT 0 3 Initial investment amount, PV 4 Maturity value at the end, FV 5 Interest compounding type, TYPE 6 Annual return associated with 100 Assumed initial investment] -->100+ (100 x 30 %) = 130] 00if compounded at the end of each year; 1 if compounded at the beginning of each year B3+(B3*30%) 30% return earned over 5 years =RATE(B1,-B2,B3,-B4,B5) [Ref: NOTE]